This report provides an assessment of Ireland’s compliance with Basel Core Principles. The assessment was undertaken as part of a Financial Sector Assessment Program (FSAP) by an MAE team and a group of peer assessors in the context of the 2000 Article IV consultations with Ireland. The conclusions of this report are based on an initial self assessment of the authorities, supplemented by additional discussions between the team and the authorities.

Ireland complies with all Basel Core Principles of Effective Banking Supervision. The CBI applies uniform standards to its licensing and supervision process, and the allocation of resources to supervision is risk-focused, relying on experienced examiners to identify and assess the various risks associated with the increasingly complex banking activities of international financial conglomerates. A Financial Supervision Policy Committee coordinates supervisory activities. The CBI has a “track record” of successful implementation of banking supervision.

The assessment took into account the specific features of the Irish market, in particular the small number of banks, and the relatively high degree of concentration. As these features change and banks engage in increasingly complex activities and products, continuous compliance with Basel Core principles will require appropriate adaptations to the current supervisory process.

I. Introduction

1. In connection with the 2000 Article IV consultations, Ireland participated
in the Financial Sector Assessment Project (FSAP).1 The assessment of Ireland's financial system included
an assessment of the individual components of the sector, as well as a review
of systemic stability, including of potential vulnerabilities that could arise
from the interlinkages among different financial sector participants.

2. The attached in-depth assessment of Ireland’s compliance with
the Basel Core Principles for Effective Banking Supervision is based on an
initial self assessment by the Irish authorities, and has been clarified
through subsequent discussions during the FSAP mission. The final assessment
benefited from further comments by the Irish authorities. As an EU member, relevant EU
Directives are discussed when necessary and appropriate. The assessment also
took into account the specific features of the Irish market.

3. Credit institutions are by far the dominant participants in the financial
sector, with banking sector assets in 1998 equivalent to more than 300 percent
of GDP. The banking sector is fairly concentrated, with the three largest banks
accounting for 47 percent of total banking assets. Excluding IFSC
banks, concentration is even larger, with only two banks accounting for 60
percent of assets. International comparisons put Ireland in a middle group in
terms of banking sector concentration and credit penetration. Following a major
round of consolidation in the banking sector in the early 1980s, the sector now
shows concentration ratios far above major EU countries (in particular Germany
and the U.K.) but
similar to those in
countries such as Australia, Canada or Switzerland.2

4. The banking sector has a strong capital base, significantly above Basel
minimum standards, an adequate liquidity base and, for most banks, a
sufficiently high level of provisions. Banks’ profitability is among the
highest in Europe, and asset quality is high with nonperforming loans
comparable to other European countries. Banks are generally liquid; however,
there has been a tendency towards a decline of funding from deposits and an
increased reliance on wholesale (interbank) funding. The major banks are
geographically well diversified, with significant business activities in the
U.S. and the U.K., and increasing operations in other countries. These banks' assets are also
well
diversified across sectors. In contrast, smaller banks, which are not
systematically important, tend to be domestically oriented and are less
diversified. Finally, there is also an active, but not systematically
important, credit union sector.3

5. The CBI is the authority for licensing and supervising banks and building
societies, pursuant to the Central Bank Acts 1942 to 1998, the Trustee
Savings Bank Act, 1989, the ACC Bank Act, 1992, the ICC Bank Act, 1992 and
various provisions implementing the EU Directives. The CBI is not responsible
for the supervision of credit unions, credit intermediaries, insurance
companies or insurance intermediaries. The recently published Insurance Act
will lead to the transfer of insurance intermediaries to the CBI’s
regulatory area.

6. The CBI has sole responsibility for banking supervision in Ireland. In
certain instances, such as denial or revocation of a banking license, and
certain types of acquisitions, the Minister for Finance has a statutory role,
as set out in the corresponding legislation.

7. Timeliness of laws and regulations is facilitated by Ireland’s
membership in the EU and the EMU. A requirement for membership is the incorporation of all EU Directives into
national law, regulations and practices. Ireland has remained current in the
implementation of all the EU Banking Directives. Following the establishment of
the euro system, in addition to the independent internal audit function, the
CBI accounts must also be audited by an independent commercial firm of auditors
to meet the requirements of the statute of the ESCB.

8. The CBI
has an
independent and “hands on” approach to licensing and supervision.
The size of the Irish banking sector allows the supervisor to give each
interested applicant individual attention during the application process. The
CBI requires banks to receive prior approval for significant changes to
business activities and also reviews changes in ownership and acquisitions in
pursuant to the CBI’s Licensing and Supervision Requirements and
Standards for Credit Institutions (CBI Standards). These standards, although
nonstatutory, supplement the statutory requirements contained in
legislation.

9. Any person engaged in “banking business” must hold a license
authorized by the CBI. The EU uses the term “credit institutions”
which includes building societies but not credit unions. The CBI requires all
applicants to provide as part of their licensing application, information on
ownership structure, detailed business plans, financial and capital adequacy
projections for the first 5 years of operations, board composition (including
background information), organizational structure, details of internal control
systems, and details of own core funding.

10. The CBI allows subsidiary banks to use systems housed and operated out of
its parent entity provided adequate and reliable backup systems exist. All
license holders are required to have an internal auditor/internal audit function where the size or nature of the operations of the credit institution warrant it, even if one exists at the parent entity.

11. In acquisitions of 20 percent or more of total assets of all license holders
in Ireland, the CBI must receive prior consent of the Minister for Finance to
approve or refuse the acquisition. In conjunction with the provisions of the
Mergers, Takeovers and Monopolies (Control) Act, 1978, the Minister will
consult with the Minister for Industry and Commerce. The EU’s Competition
Commission would also review such a major acquisition.

12. All significant acquisitions of bank stock, by another bank or by a nonbank
entity, require the approval of the CBI per the 1989 Act. Banks’
investments in nonbank entities are not allowed to exceed 15 percent of own
funds in the acquisition of 10 percent or more of any “relevant body
corporate” (an institution different than a credit or financial
institution) and the total of all such holdings cannot exceed 60 percent of own
funds. A credit institution should not acquire, directly or indirectly,
more than 10 percent of the shares or other interest in another company without
the prior written approval of the CBI. There are no absolute barriers to the
CBI approving hostile acquisitions.

13. Consistent with the Basel Capital Accord, minimum capital requirements set
by the EU Own Funds (89/229/EEC) and Solvency Ratio (89/647/EEC) Directives 4 and implemented by the CBI in
Administrative Notice of July 1991 (further amended in 1995) require the
capital-to-risk-weighted-assets ratio for credit institutions to be 8 percent,
half of it in the form of equity capital. The CBI may increase this requirement
for any bank based on a bank’s activities and risk profile. In November
1995, the CBI set out the Capital Adequacy Directive (CAD) to be implemented in
January 1996. The CAD extends the concept of capital to cover market risks.
Amendments related to the recognition of mathematical models (such as
Value-at-Risk [VaR] models) for capital adequacy calculations were implemented
in Ireland in June 2000. Ratios for institutions, which are parent entities, are
calculated on a consolidated basis. In addition to the required minimum ratio
on a consolidated group basis, the CBI also applies minimum ratio requirements
below the group level to achieve an appropriate capital distribution throughout
the group.

14. Credit institutions are required to have appropriate policies related to the
management and control of lending that include credit assessment, credit
review, risk management, the monitoring and control of large exposures and
prudent provisioning for loan losses. The CBI checks that the Asset and
Liability Committee and Credit Committee of credit institutions operate
independently of the business units taking the corresponding risk.

15. The CBI Standards do not indicate specific asset
grading/classification. The CBI requires that credit institutions have an
internal loan classification system in place. The Standards provide
specific limits in relation to credits granted to directors, significant
shareholders and businesses where the bank is a shareholder. Directors are
limited to 2 percent of a bank’s own funds and the aggregate of all
directors and their businesses must not exceed 10 percent of own funds. A
credit institution’s exposure to significant shareholders is limited to
10 percent of a bank’s own funds; the aggregate of all such exposures is
limited to 30 percent of own funds. The CBI’s Standards requires monitoring and control of large
exposures, as part of the implementation of the EU Directive on Monitoring and
Control of Large Exposures (92/121/EEC). Credit institutions report large
exposure information to the CBI quarterly. The CBI monitors compliance with
large exposures on a consolidated basis.

16. The CBI reviews asset quality information on a monthly basis, including
reports on nonperforming assets, nonaccrual assets, provisions, write-offs and
recoveries including on- and off-balance sheet items. The CBI’s
Standards require credit institutions to have in place appropriate policies
related to credit assessment and review, and prudent provisioning for loan
losses. Supervisory action concerning problem assets can take the form of a
condition on the license or direction to the Board to curtail loan growth
and/or increase bad debt provisions or raise the level of capital to compensate
for the higher risk associated with problem assets. Such supervisory action
would normally be done in connection with an on-site inspection.

17. The CBI has implemented the EU Directive on the Monitoring and Control of
Large Exposures of Credit Institutions (92/121/EEC) in February 1994. A credit
institution may not incur an exposure to a client or group of connected clients
the value of which exceeds 25 percent of its own funds. A large exposure
to a client or group of connected clients is one that exceeds 10 percent of an
institution’s own funds. An additional aggregate limit of
800 percent of own funds applies to large exposures. Large exposures and
sectoral concentrations are reported to the CBI quarterly on a consolidated
basis.

18. The CBI applies more stringent limits to connected parties than those
applied to large exposures. However, there is no formalized written CBI
requirement covering transactions over a specified amount to connected or
related parties being subject to Board approval. Nevertheless, the CBI has the
authority to restrict or limit future transactions with connected parties
detected during on-site inspections, and require approval of such transactions
by the bank’s Board.

19. The vast majority of credit institutions are involved in cross border
activities. In instances where a particular country experiences problems, the
CBI will survey its banks in conjunction with reviewing the currency and large
exposure reports to identify the magnitude of the exposure and determine if any
supervisory action is needed.

20. The EU Directive on market risk (93/6/EEC) was implemented by the CBI in
1995. The CBI has established a separate Risk Policy Unit with specialists for
the evaluation of bank models, who should keep abreast of the products offered
by credit institutions. The CBI collects information on interest rate, equity,
foreign exchange, settlement/counterparty risk and large exposures related to
trading activity through monthly prudential returns. In implementing the CAD,
capital requirements for market risks are set out. Most banks involved in
activities subject to market risk are international institutions
using some type of internal VaR model. The CBI looks into an
institution’s internal audit process for support in ensuring that banks
conduct periodic validation/testing of the systems used to measure market risk.
A number of banks have requested the CBI’s formal review and approval of
their models under CAD. The CBI plans to require that an institution with an
approved model perform stress testing, scenario analysis and contingency
planning.

21. The CBI’s Standards require banks to have comprehensive risk
management systems commensurate with the scope, size and complexity of all the
bank’s activities, including derivatives and associated risks, for
continuous measuring, monitoring and controlling of risk. A minimum ratio of
liquid assets to total borrowing of 25 percent is set in the CBI’s
Standards, which will be substituted in the future by a stock and maturity
mismatch approach (gap-based), which has been piloted
with several banks throughout last year.

22. The May 1992 “Auditing Guidelines” (for banks in the Republic of
Ireland) together with the EU Second Banking Directive (89/646/EEC) set out
guidelines and requirements related to internal controls. Publicly quoted
companies are expected to comply with best practice on corporate governance
issues. The CBI’s
Standards require that credit institutions have in place “such
committees of directors and management as are necessary to ensure that the
business of the credit institution is being managed, conducted and controlled
in a prudent manner and in accordance with sound administrative
principles.” The CBI’s
Standards require that every bank manages its business in accordance
with sound administrative and accounting principles and put in place and
maintains internal control and reporting arrangements and procedures to ensure
that the business is so managed.

On-site inspections rely on the CBI’s on-site examiner inspection
manual and on guidance notes prepared by the Money Laundering Steering
Committee to determine that institutions carry out appropriate customer
identification procedures, including guidance on the prevention and detection
of criminal activity of fraud. An evaluation by the Financial Action Task Force
in April 1998 concluded that Ireland has a comprehensive and solid legislative
scheme in place for combating money laundering.

24. The CBI has the legal authority to require submission of information by
banks, pursuant to corresponding sections of the 1971 Act, and as amended in
the 1989 Act. The implementation of additional directives confers other
specific powers to the CBI. The EU Directive on the Annual
and Consolidated Accounts of Credit Institutions (86/635/EEC), implemented in
1992 establishes the proper accounting in banks’ financial statements. The EU Directive on the
Consolidated Supervision of Credit Institutions (92/30/EEC), implemented in
1992, requires the CBI to supervise a credit institution and its associated
enterprises on a consolidated basis. Implementation of the EU Post-BCCI
Directive (95/26/EC) enables the CBI to require the information necessary to
establish the existence and degree of close links between the institution and
third parties.

25. Under the 1989 Act and implementation of the EU Post-BCCI Directive, there
is a duty on the part of external auditors to report matters noted during the
course of an audit to the CBI. This refers to matters likely to affect the
solvency of the institution; material deficiencies in the financial systems of
control; material inaccuracies or omissions in returns of a financial nature
made to the CBI; any fact or decision likely to affect the continuous
functioning of the institution; and anything that would lead to a refusal by
the auditor to certify the accounts or to the issue of a qualified audit
report.

26. The CBI obtains an understanding of the activities of all material parts of
supervised banking groups by the collection of consolidated quarterly returns,
discussions with senior management at review meetings at which the performance
of all the group’s business units are discussed and meetings with other
supervisors, e.g., annual meetings with the supervisor of Irish banks’
foreign subsidiaries and with the Irish supervisor of banks’ life
assurance subsidiaries.

27. The standardized reports required by the CBI are collected from all
institutions on a comparable basis and relate to the same dates and periods as
appropriate. The CBI prepares “Notes on Compilation” that are based
on best accounting and banking practice and standards as set out in Financial
Reporting Standards and Accounting Practice Standards. Annual accounts must be
prepared according to the EU Accounts Directives (86/635/EEC and 89/117/EEC).
The CBI does not rely primarily on the work of external auditors to perform
on-site type inspection activities.

28. The CBI may impose conditions on the license of a bank; issue directions
where it is in the public interest to do so in the judgment of the CBI; direct
a bank not to advertise for deposits from the public; petition to the High
Court to wind up a bank; petition for the appointment of an examiner; revoke a
banking license; seek a Court injunction prohibiting continuation of certain
contravention or failures to comply with CBI legislation; or prosecute
summarily certain offenses.

29. The CBI ensures that local management pays particular attention to higher
risk foreign operations and operations at geographically remote locations. The
EU Directive on Coordination of Supervision requires that supervisors consult
with the competent authority in another jurisdiction prior to granting
authorization to a credit institution to start cross-border operations.

30. Information sharing arrangements are generally established on a formal basis
through Memoranda of Understanding (MOUs) which set out the respective duties
of home and host supervisors. Bilateral MOUs have been signed with the banking
supervisory authorities in Belgium, Denmark, France, Germany, Italy,
Luxembourg, the Netherlands and the United Kingdom; and are under negotiation
with the Isle of Man, Austria, Poland, Spain, South Africa and the
USA.

31. Subsidiaries of foreign banks and licensed branches from out of the EEA are
subject to the same full set of requirements and standards as domestic banks
with the following exception: branches of non-EEA countries are not required to
have capital and thus requirements regarding own funds do not apply. The CBI
will not authorize a bank unless it is satisfied that the home country
supervisor effectively exercises its supervisory responsibilities on a
consolidated basis. It can share information with a foreign supervisory
authority where that authority exercises functions which correspond to the
licensing and supervision functions of the CBI and has obligations in relation
to non-disclosure of information which are similar to the obligations imposed
on the CBI.

Timeliness of laws and regulations is facilitated by Ireland’s
membership in the EU and the EMU.

Licensing and structure

2–5

Compliant

All license holders are required to have an internal auditor/internal audit
function, even if one exists at the parent entity elsewhere.

Prudential regulations and requirements

6–15

Compliant

There is no formalized written CBI requirement making transactions over a
specified amount to connected or related parties subject to Board approval;
however, the CBI has the authority to restrict or limit future transactions
with connected parties detected during on-site inspections.

Methods of ongoing banking supervision

16–20

Compliant

By implementing the EU Post-BCCI Directive, there is a duty on the part of external auditors to report matters noted during the course of an audit to the CBI on anything that would lead to a refusal by the auditor to certify the accounts or to the issue of a qualified audit report.

Information requirements

21

Compliant

The CBI does not rely primarily on the work of external auditors to perform on-site type inspection activities.

Remedial measures and exit

22

Compliant

Cross-border banking

23–25

Compliant

The only exception to prudential rules are branches of non-EEA countries, which are not required to have separate capital and thus requirements regarding own funds do not apply.

32. Ireland complies with all Basel Core Principles of Effective Banking
Supervision. Since many of the EU Directives, to a large extent, parallel those
Principles, implementation of these Directives—which is currently required
under the EU rules—has facilitated compliance with the Basel Core Principles.
Since January 1, 2000, a Financial Supervision Policy Committee was established
to better coordinate supervisory activities, and additional steps were taken to
further enhance the "risk-based approach" to supervision. This approach is
based on using results from the CBI’s off-site bank analysis to determine
the frequency and depth of on-site inspections and the contents of meetings
with credit institutions. The detailed assessments of principles found:

Laws are in place for banking and for the supervision of banking by the CBI,
whose objectives and responsibilities are clearly defined. The laws and
supporting regulations provide a framework of minimum prudential standards that
banks need to meet. The CBI also has the necessary independence, staff and
monetary resources, and power to authorize and supervise the banks licensed in
Ireland. The CBI has set up a mechanism for coordinating actions with DETE, the
insurance supervisory body. A framework exists for sharing supervisory
information, as long as it is kept confidential and used for supervisory
purposes only.

The term “bank” is clearly defined in laws and regulations and
its use is limited to licensed and supervised institutions. The CBI has the
right to set criteria for licensing banks. The criteria for issuing licenses
are consistent with those applied in ongoing supervision. “Significant
ownership” is clearly defined in Irish laws and regulations. Laws
and regulations clearly define what types and amounts of acquisitions and
investments need the CBI’s approval. The criteria used by the CBI
includes that new acquisitions and investments do not expose the bank to undue
risks or hinder effective supervision.

Laws or regulations require all banks to maintain a minimum capital adequacy
ratio, not lower than what was established in the Basel Capital Accord. Capital
adequacy ratios are calculated on both a consolidated and a solo basis for the
bank entities within a group. The CBI seeks to ensure that prudent credit and
investment criteria, policies, practices and procedures are developed,
approved, implemented, and reviewed by bank management and the board of
directors. It requires banks to formulate
specific policies for identifying and dealing with problem credits including
procedures to ensure that classifications, loan-loss provisions and write-offs
reflect realistic repayment expectations. CBI regulations impose limits on
large exposures to a single borrower or “closely related” group of
borrowers, and more stringent limits to connected parties. The CBI monitors
whether a bank’s policies and procedures give due regard to the
identification, monitoring and control of country risk, transfer risk, and
market risk. Credit institutions must have in place a comprehensive and updated
risk management process that identifies, measures, monitors and controls
material risks.

The CBI’s supervision of credit institutions includes an in-depth
analysis and evaluation of individual banks for which it relies on both on-site
and off-site supervision. The CBI has legal authority to require banking
organizations to submit information on both a solo and consolidated basis. To a
certain extent, CBI examiners may rely on the work of external auditors, as
deemed appropriate. The CBI is aware of the overall structure of banking
organizations or groups and has an understanding of the activities of all
material parts of these groups, including those that are supervised directly by
other agencies.

The CBI has the authority to hold management responsible for ensuring that
financial record-keeping systems and the data they produce are reliable, and
that supervisor-required reports are submitted on a timely and accurate
basis.

The CBI has the authority, backed by legal sanctions, to take an appropriate
range of remedial actions against, and impose penalties upon, banks, depending
on the severity of the situation.

The CBI has the authority to supervise the overseas activities of locally
incorporated banks and to determine whether management is maintaining proper
oversight of the bank’s foreign branches, joint ventures, and
subsidiaries. For significant overseas operations of Irish banks, the CBI
has established informal or formal arrangements with host supervisors for
appropriate information sharing on the financial condition and performance of
such operations in the other’s country. Local branches and subsidiaries
of foreign banks are subject to similar prudential, inspection and regulatory
reporting requirements as domestic banks.

33. Like supervisory authorities in other developed economies, the CBI will
continue to be challenged by license requests for innovative operations (such
as Internet banking and electronic purses) and requests for approval of
increasingly complex activities and products. The CBI will need to monitor its
current supervisory approach, as it may need to
rely more on rules as the market expands and complexity increases.

1 The assessment was prepared
by the International Monetary Fund and a group of peer assessors participating
in the Financial Sector Assessment Project (FSAP) mission. The team was led by
Compliance with the Basel Core Principles J.T. Baliño and included Anne-Marie Gulde, Angeliki Kourelis,
and Armando Morales (all MAE), and Natalia Koliadina. Peer assessors on banking
supervision included, Domenico Gammaldi (Bank of Italy) and Kathleen
O’Brien (Office of the Comptroller of the Currency).

2 In continental Europe
consolidation is now ongoing, also leading to more concentrated banking
sectors.

3 Nonbank deposit-taking
institutions are not supervised by the CBI nor are they covered by the Basel
Core Principles or EU Directives. They are supervised by another government
Ministry. Any eventual vulnerability appears limited given their size and
specific restrictions on business and deposit activities and membership.